In the first quarter of 2022, rising prices of commodities and services and decreases in the purchasing value of money were conspicuous. It’s inflation in action.
Even among investors like myself, it is undeniable that inflation is a subject of discussion. Will it affect your real estate investments? Will your business suffer from it or benefit from it? It’s clear that inflation is a major concern for everyone.
Some think current inflation (paywall) is because of more money printed by the Federal Reserve to keep the economy afloat, while others have pointed to disruptions from the pandemic. These past two years, the government has implemented spending and entitlement programs, and as investors, we must focus on keeping up with the pace of inflation and how to ride the wave.
Inflation As A Fear Of The Unknown
Many investors are outspoken about their fear of inflation because it is happening in a different scenario—with a pandemic—that they have never experienced before. Are they fearing inflation? Or are they afraid of the unknown?
I’ve found that fearing inflation varies among investor groups. Some see current inflation as enigmatic, while others prefer to take advantage of inflation rather than view it as a problem.
Inflation will test how you assess risk and manage it. Whether you admit it or not, risk becomes your companion once you become an investor or a business owner. It is how you handle risk that makes a difference.
The Impact Of Inflation On Real Estate Investments
When it comes to real estate, investors should not worry about the rising inflation. In my view, investors are the ones who are going to benefit from it. The people who are aren’t going to benefit are likely the people, unfortunately, on the lower end of the economic spectrum: people who don’t have their money in the game, who are sitting it in debt or with lazy equity in their properties, their primary residence.
To be clear, property owners greatly differ from real estate investors. Not all property owners are real estate investors. For example, if you are a residential property owner and your property is not generating any cash flow, that makes your property a lazy equity property. On the other hand, if you own a rental property that’s generating cash flow, then that property is an asset and you as the owner can be considered a real estate investor.
Increases In Real Estate Value
Property appreciation and cash flow are the results when you invest in genuine real estate property investment—genuine in the sense that your property (asset) is working for you. This is great news for investors as real estate surpasses other asset classes. But beware to park your money in lazy equity. You want your property to be working for you, not the other way around. Real estate is a stable asset that beats rece\ssion.
Real estate becomes an asset if it has cash flow—through rents. Investors hedge or leverage that inflation is going to help them because inflation is what pushes rents up (paywall). Numerous studies have shown that in the event of high inflation, there will be a rise in rent. Thus, a rise in cash flow. The cost of rent may even exceed other commodities like food and energy. Take note: Generally, there hasn’t been a major decrease (paywall) in rent fees in history for a long period of time.
The Devaluation Of Debt
The decreasing value of the dollar is a natural phenomenon when there’s a rise in inflation. Thus, making your current debt cheaper as the inflation boosts.
With all these pros, is there a disadvantage of inflation to real estate investors?
Sure, there is. Rising costs of construction materials, petrol, energy and other commodities can have an impact. But you know what, even if all materials increase in price, I think the pros outweigh the cons of inflation from the perspective of a real estate investor.
To sum up, I think the inflation rate is greatly understated. For investors, I suggest to get your money to work, avoid lazy equity and consider locations that have cash flow. Even if property development is costly, there’s no doubt that investing in real estate can be a good hedge against inflation. Inflation can be good for real estate investors as long as you make sure to do your due diligence in assessing the property.
For those who are starting out, the best time to invest is yesterday, but tomorrow will never be too late. Don’t let inflation intimidate you! As long as you are confident with your numbers and you know your target property market, I think you’ll be on the right path.
By: Lane Kawaoka I Forbes I April 2022